China corporate onshore issuance expected to grow
Easing policies boost funding conditions, attract international investors
6 Mar 2020 | Darryl Yu

The emergence of the coronavirus epidemic is expected to not seriously impact growth in the Chinese onshore bond market. That’s according to a recent research note from Moody’s Investor Service that cited the easing steps taken after the Lunar New Year by the People’s Bank of China to ensure liquidity in the system. Moody’s expects that onshore corporate issuance in 2020 will exceed the 9.7 trillion renminbi (US$1.39 trillion) posted on the onshore market in 2019.

While this bodes well for the overall market, China’s privately owned enterprises (POEs), despite the easing measures, are expected to have difficulty in their fundraising. “Onshore investors will continue to prefer state-owned enterprises over POEs," explains Miranda Zhai, an analyst at Moody’s. "Among state-owned enterprises, issuance growth in 2020 will - as it was in 2019 - mainly come from local government financing vehicles.”

The combination of risk aversion from investors due to coronavirus fears and the incremental rise of bond defaults from POEs have limited financing options for those companies. In 2019, Chinese POEs represented 90% of the defaulted bonds recorded in the country.

Despite the overall negative sentiment in the current market, there has been excitement around the continuing opening-up of China’s financial markets. In late February 2020, J.P. Morgan announced that it would start adding China onshore bonds into its Government Bond Index Emerging Markets. This could translate into US$3 billion of fresh inflows each month.

“The inclusion reflects global investors’ demand for Chinese bonds following the country’s granting of access to its domestic market and removal of its previous quota system,” says Ming Leap, associate director, fixed income at HSBC Global Asset Management. “The stability of the renminbi versus other emerging market currencies, the high credit rating, and the generous yields offered by Chinese government bonds have attracted growing interests from international investors, particularly at a time when nearly a quarter of the global bond market is offering negative yields.”

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